Optimal Vertical Arrangements When Resale is Possible

Abstract

This paper pinpoints optimal vertical arrangements in settings characterized by incomplete contracting and resale of an intermediate input (a “widget”). In the Grossman-Hart-Moore property rights theory, we conclude that sometimes strictly complementary assets should be owned separately to permit the emergence of a secondary market. In a richer model where the parties choose specific and nonspecific investments, vertical separation may also dominate joint ownership. The article then examines the profitability of three integration forms when the proposed bargaining model substitutes random-order values (e.g., the Shapley value). The conclusions differ markedly from existing claims. (JEL C70, C78, D23, L42)